The good company

The good
company
A survey of corporate
social responsibility
January 22nd 2005
Republication, copying or redistribution by any means is expressly prohibited without the prior written permission of The Economist
A survey of corporate social responsibility 1
The Economist January 22nd 2005
The good company
Also in this section
The union of concerned
executives
CSR as practised means many dierent
things. Page 6
The world according to CSR
Good corporate citizens believe that capitalism is wicked but redeemable.
Page 10
Prot and the public good
Companies that merely compete and prosper
make society better o. Page 13
The ethics of business
Good corporate citizens, and wise governments, should be wary of CSR. Page 16
The movement for corporate social responsibility has won the battle of
ideas. That is a pity, argues Clive Crook
O
Acknowledgments
This survey owes a lot to Misguided Virtue by David
Henderson, published by the Institute of Economic Aairs
in London and the Competitive Enterprise Institute in
Washington, DC; A Poverty of Reason by Wilfred
Beckerman, published by the Independent Institute; and
Just Business by Elaine Sternberg, published by Oxford
University Press. This is not to say that these authors would
agree with each other, or with this survey, about all of the
issues discussed.
An audio interview with the author is at
www.economist.com/audio
VER the past ten years or so, corporate
social responsibility (CSR) has blossomed as an idea, if not as a coherent practical programme. CSR commands the attention of executives everywhereif their
public statements are to be believedand
especially that of the managers of multinational companies headquartered in Europe or the United States. Today corporate
social responsibility, if it is nothing else, is
the tribute that capitalism everywhere
pays to virtue.
It would be a challenge to nd a recent
annual report of any big international
company that justies the rm’s existence
merely in terms of prot, rather than service to the community. Such reports often
talk proudly of eorts to improve society
and safeguard the environmentby restricting emissions of greenhouse gases
from the sta kitchen, say, or recycling ofce stationerybefore turning hesitantly
to less important matters, such as prots.
Big rms nowadays are called upon to be
good corporate citizens, and they all want
to show that they are.
On the face of it, this marks a signicant
victory in the battle of ideas. The winners
are the charities, non-government organisations and other elements of what is
called civil society that pushed for CSR in
the rst place. These well-intentioned
groups certainly did not invent the idea of
good corporate citizenship, which goes
back a long way. But they dressed the notion in its new CSR garb and moved it
much higher up the corporate agenda.
In public-relations terms, their victory
is total. In fact, their opponents never
turned up. Unopposed, the CSR movement has distilled a widespread suspicion
of capitalism into a set of demands for action. As its champions would say, they
have held companies to account, by
embarrassing the ones that especially offend against the principles of CSR, and by
mobilising public sentiment and an almost universally sympathetic press
against them. Intellectually, at least, the
corporate world has surrendered and gone
over to the other side.
The signs of the victory are not just in
the speeches of top executives or the diligent reporting of CSR eorts in their published accounts. Corporate social responsibility is now an industry in its own right,
and a ourishing profession as well. Consultancies have sprung up to advise companies on how to do CSR, and how to let it
be known that they are doing it. The big auditing and general-practice consulting
rms oer clients CSR advice (while conspicuously striving to be exemplary corporate citizens themselves).
Most multinationals now have a senior
executive, often with a sta at his disposal,
explicitly charged with developing and coordinating the CSR function. In some
cases, these executives have been recruited from NGOs. There are executiveeducation programmes in CSR, businessschool chairs in CSR, CSR professional 1
2 A survey of corporate social responsibility
2 organisations, CSR websites, CSR newslet-
ters and much, much more.
But what does it all amount to, really?
The winners, oddly enough, are disappointed. They are starting to suspect that
they have been conned. Civil-society advocates of CSR increasingly accuse rms
of merely paying lip-service to the idea of
good corporate citizenship. Firms are still
mainly interested in making money, they
note disapprovingly, whatever the CEO
may say in the annual report. When commercial interests and broader social welfare collide, prot comes rst. Judge rms
and their CSR eorts by what the companies do, charities such as Christian Aid (a
CSR pioneer) now insist, not by what they
sayand prepare to be unimpressed.
By all means, judge companies by their
actions. And, applying that sound measure, CSR enthusiasts are bound to be disappointed. This year’s Giving List, published by Britain’s Guardian newspaper,
showed that the charitable contributions
of FTSE 100 companies (including gifts in
kind, sta time devoted to charitable
causes and related management costs) averaged just 0.97% of pre-tax prots. A few
give more; many give almost nothing
(though every one of them records some
sort of charitable contribution). The total is
not exactly startling. The gures for American corporate philanthropy are bigger, but
the numbers are unlikely to impress many
CSR advocates.
Still, you might say, CSR was always intended to be more about how companies
conduct themselves in relation to stakeholders (such as workers, consumers, the
broader society in which rms operate
and, as is often argued, future generations)
than about straightforward gifts to charity.
Seen that way, donations, large or small,
are not the main thing.
Setting gifts aside, then, what about the
many other CSR initiatives and activities
undertaken by big multinational companies? Many of these are expressly intended to help prots as well as do good. It
is unclear whether this kind of CSR quite
counts. Some regard it as win-win, and
something to celebrate; others view it as a
sham, the same old tainted prot motive
masquerading as altruism. And, even to
the most innocent observer, plenty of CSR
policies smack of tokenism and political
correctness more than of a genuine concern to give back to the community, as
the Giving List puts it. Is CSR then mostly
for show?
It is hazardous to generalise, because
CSR takes many dierent forms and is dri-
The Economist January 22nd 2005
ven by many dierent motives. But the
short answer must be yes: for most companies, CSR does not go very deep. There are
many interesting exceptionscompanies
that have modelled themselves in ways
dierent from the norm; quite often, particular practices that work well enough in
business terms to be genuinely embraced;
charitable endeavours that happen to be
doing real good, and on a meaningful
scale. But for most conventionally organised public companieswhich means almost all of the big onesCSR is little more
than a cosmetic treatment. The human
face that CSR applies to capitalism goes on
each morning, gets increasingly smeared
by day and washes o at night.
Under pressure, big multinationals ask
their critics to judge them by CSR criteria,
and then, as the critics charge, mostly fail
to follow through. Their eorts may be
enough to convince the public that what
they see is pretty, and in many cases this
may be all they are ever intended to
achieve. But by and large CSR is at best a
gloss on capitalism, not the deep systemic
reform that its champions deem desirable.
Does this give cause for concern? On
the whole, no, for a simple reason. Capitalism does not need the fundamental reform
that many CSR advocates wish for. If CSR
really were altering the bones behind the
face of capitalismsawing its jaws, removing its teeth and reducing its bitethat
would be bad: not just for the owners of
capital, who collect the company’s prots,
but, as this survey will argue, also for society at large. Better that CSR be undertaken
as a cosmetic exercise than as serious surgery to x what doesn’t need xing.
We are an equal-opportunity employer
But this is not the end of the matter. Particular CSR initiatives may do good, or
harm, or make no dierence one way or
the other, but it is important to resist the
success of the CSR ideathat is, the almost
universal acceptance of its premises and
main lines of argument. Otherwise bones
may indeed begin to snap and CSR may
encroach on corporate decision-making in
ways that seriously reduce welfare.
Private enterprise requires a supporting
infrastructure of laws and permissions,
and more generally the consent of electorates, to pursue its business goals, whatever
they may be. This is something that CSR
advocates emphasisethey talk of a licence to operateand they are quite right.
But the informed consent of electorates,
and an appropriately designed economic
infrastructure, in turn require an understanding of how capitalism best works to
serve the public good. The thinking behind CSR gives an account of this which is
muddled and, in some important ways,
downright false.
There is another danger too: namely,
that CSR will distract attention from genuine problems of business ethics that do
need to be addressed. These are not in
short supply. To say that CSR reects a mistaken analysis of how capitalism serves
society is certainly not to say that managers can be left to do as they please, nor to
say that the behaviour of rms is nobody’s
concern but their own. There is indeed
such a thing as business ethics: managers need to be clear about that, and to comprehend what it implies for their actions.
Also, private enterprise serves the public good only if certain stringent conditions
are met. As a result, getting the most out of
capitalism requires public intervention of
various kinds, and a lot of it: taxes, public
spending, regulation in many dierent areas of business activity. It also requires
corporate executives to be accountable
but to the right people and in the right way.
CSR cannot be a substitute for wise
policies in these areas. In several little-noticed respects, it is already a hindrance to
them. If left unchallenged, it could well become more so. To improve capitalism, you
rst need to understand it. The thinking behind CSR does not meet that test. 7
The Economist January 22nd 2005
A survey of corporate social responsibility 3
The union of concerned executives
CSR as practised means many dierent things
O
N THE face of it, questioning the efforts of companies to behave responsibly is an odd thing to dounless you are
accusing them of faking it, or of falling below some commonly agreed minimum
standard. How could a company ever behave too responsibly? The very term corporate social responsibility endorses the
actions to which it is applied. No doubt
that is why companies fasten the label to a
quite bewildering variety of supposedly
enlightened, progressive or charitable corporate actions.
At one end of the broad span of CSR lie
corporate policies that any well-run company ought to have in place anyway, policies that are called for on any sensible
view of business ethics or good management practice. These include not lying to
your employees, for instance, not paying
bribes, and looking farther ahead than the
next few weeks. At the other end of the
range are the more ambitious and distinctive policies that dierentiate between
leaders and laggards in the CSR racelarge
expenditures of time and resources on
charitable activities, for instance, or binding commitments to ethical investment,
or spending on environmental protection
beyond what regulators demand.
In other words, at the mild end of the
range are practices that do not need any
special CSR defence: they can perfectly
well justify themselves in simpler ways, either as meeting standards of ordinary decency (of which more later), or as being
necessary in any case if managers are to
run a successful business. The issue here is
not whether the activities themselves
make sense, but whether they deserve to
be dignied by the term corporate social
responsibilitythat is, whether they deserve the special praise which this label is
intended to elicit.
At the strong end of the range, many activities do deserve a special label: they go
well beyond the requirements of ordinary
decency or business necessity, so the term
CSR is serving a useful purpose. But can
the same be said of the policies?
At rst sight that looks like a churlish
question. What could possibly be wrong
with policies such as corporate charity or
careful attention to the demands of environmental protection and sustainable development? Sometimes nothing, but it depends. Many individual acts of good
corporate citizenship do make sense in
business terms, or as ways of advancing
the public good, or both. But others do not.
Sometimes CSR policies are motivated
by genuine concern for the intended beneciaries, or by a conscientious belief that
businesses must earn their licence to operate. There are some kindly CEOs out
there, and some with a troubled conscience. But there can be other motives for
CSR too. There are quite a few vain CEOs
who enjoy the attention which CSR leadership brings them, and many others who,
having climbed their way to the top, seem
to nd running a protable company too
small a test of their talents. Yet whatever
the variations, one thing is constant: the
weight given to specious arguments about
what businesses must do to justify their
existence and pay their way in society.
Putting those arguments about the duties of business to one side for the moment, setting motives aside as well and
thinking only of results, one might ask two
questions of any act of supposedly enlightened corporate citizenship. Does it improve the company’s long-term protability? And does it advance the broader
public good?
Two tests
Successful managers usually do both at
once, of course: merely by running a protable company, they are likely to be advancing the public good as well. This argument will be taken up in more detail
below. Some of the business practices that
are often (perhaps misleadingly) labelled
as CSR do fall into this category: they raise
prots and advance society’s well-being at
the same time. Examples include establishing a reputation for dealing honestly
with employees, suppliers and customers.
This is the win-win kind of CSRthe sort
that fails to impress much of civil society.
Perhaps it would be better to call it simply
good management.
Turning back to those two questions,
however, note that there are three other
possible answers as well. These are
mapped out in the table on the next page. 1
4 A survey of corporate social responsibility
2 Some kinds of CSR reduce prots but raise
social welfare (this is what civil society
likes best: call it borrowed virtue, for reasons to be explained in a moment). There
is also CSR that raises prots but reduces
social welfare (pernicious CSR), and CSR
that reduces both prots and welfare (a polite name for which might be delusional
CSR). Consider some examples.
To begin with, win-win, or good management. There is a lot of it about. Many
executives in the CSR movement deserve
credit for testing and drawing attention to
novel practices that can yield these good
results. Their ideas may not be applicable
in all or even most companies, but their
success in particular cases is impressive.
One of the most enthusiastic and persuasive evangelists of win-win CSR is
Marc Benio, head of salesforce.com, a
strikingly successful internet-based business-services company. In his book,
Compassionate Capitalism, he explains,
among other things, how good corporate
citizenship can be used to attract, retain
and motivate the best workers. His company encourages its sta to devote time, at
the rm’s expense, to charitable works. In
complementary ways, it also provides
exibility in working hours and conditions. The character of the rm, as perceived by its employees and its customers
alike, is closely associated with this commitment to good causes.
All this seems to pay. Mr Benio argues
that this draws the right kind of people to
the rmteam players, joiners, volunteers,
generous and committed colleagues with
a sense of loyalty to the enterprise. This
kind of corporate philanthropy, which
marries good works with a clever way of
sorting and motivating sta, is undoubtedly catching on.
When you press a CEO for details of a
company’s CSR policies, and for their business rationale, you nd that every rm believes that its CSR actions fall in the winwin box. No chief executive wants to believe that the rm’s various services to the
community might reduce social welfare,
and none seems willing to admit that his
enlightened management practices might
reduce protswhat would the shareholders make of that? But those other cells of
the matrix are far from empty.
A clear instance of an action that reduces prots while (presumably) improving social welfare is a straightforward cash
donation to charity. The donations featured in the Giving List fall into this category. Sums donated in this way have
soared recently in response to the Asian
The Economist January 22nd 2005
tsunami. You might suppose that devoting
prot to the public interest is CSR at its best,
or at any rate its noblest. The enlightened
company is surrendering some of its earnings to make the world a better place.
Philanthropy that isn’t
As many CEOs point out, this is not to say
that there are no business benets. Some
executives think of their charitable donationsespecially gifts such as sponsoring
high-prole sporting or artistic eventsas
a kind of advertising. Others may feel that
their companies, or their industries (oil, tobacco, pharmaceuticals), have such a poor
image with the public at large that generous charitable donations are needed to redress matters. But straightforward corporate philanthropy of this kind is not
woven into the way the rm manages its
personnel, so the commercial benets are
probably limited. Most cash donations out
of prots probably do represent a net loss
of prots (even if the loss is less than the
gross outlay).
And what, you might ask, is wrong
with that? What is wrong with a company
giving part of its prots to help the victims
of the disaster in Asia, for instancea good
cause if ever there was one?
Not so fast. Remember that corporate
philanthropy is charity with other people’s moneywhich is not philanthropy at
all. When a company gives some of its prots away in a good cause, its managers are
indulging their charitable instincts not at
their own expense but at the expense of
the rm’s owners. That is a morally dubious transaction. When Robin Hood stole
from the rich to give to the poor, he was
still stealing. He might have been a good
corporate citizen, but he was still a bandit
and less of one, arguably, than the vicariously charitable CEO, who is spending
money taken not from strangers, but from
people who have placed him in a position
of trust to safeguard their property. That is
why the box in the table containing corporate philanthropy is marked (perhaps
too politely) borrowed virtue.
Pick your permutation
Varieties of CSR
Raises
profits
Reduces
profits
Raises
social welfare
Reduces
social welfare
Good
management
Pernicious
CSR
Borrowed
virtue
Delusional
CSR
Note that the world’s most spectacular
philanthropiststhink of the Bill & Melinda Gates Foundation, with its endowment of $27 billionare not spending the
prots of the companies they are associated with but their own private wealth.
That is the real thing, true philanthropy,
and is nothing but admirable, especially if
the givers are taking care to ensure the
money is spent wisely, as the biggest private foundations now do.
Philanthropy nanced out of the prots
of publicly owned companies is a quite
dierent thing, ethically speaking. Shareholders might expect to be allowed to
spend their money on good causes of their
own choosing, rather than seeing the managers whose salaries they pay take that uplifting duty upon themselves.
In the case of some public companies, it
is true that there are mitigating circumstances. Some companies have a tradition
of generosity with shareholders’ money
stretching many years back. Some, for instance, are formerly private or demutualised enterprises which, on going public,
created charitable foundations and undertook to keep them nanced. In these cases,
the shareholders knew what they were
getting into when they acquired stakes in
the companies. Conceivably, these policies may even be among the reasons why
some shareholders acquired their stakes in
the rst place. At any rate, such owners
have little or no reason for complaint. As
for the rest, the majority, it might have
been polite to ask.
Still judging acts by their eects, as opposed to motives and underlying rationale, the most harmful kinds of CSR, however, are the pernicious and delusional sortsthat is, policies and
practices that actually reduce social welfare. How can that happen? All too easily.
Most CSR, in fact, is probably delusional, meaning that it reduces both prots
and social welfare, even if the cost under
both headings is usually small. Almost all
CSR has at least some cost, after all, even if
it is no more than a modest increase in the
rm’s bureaucratic overhead. That cost
subtracts from social welfare in its own
right. So the kind of CSR that merely goes
through the motions, delivering no new
resources to worthy causes, giving the
rm’s workers or customers no good reason to think more highly of it (perhaps the
opposite), involves a net loss of welfare.
Or consider the current enthusiasm for
recycling. No doubt there are cases where
it makes good business sense to recycle.
These fall under the good management 1
The Economist January 22nd 2005
2 heading: they increase prots and (mainly
for that reason) social welfare as well. But
the point is that recycling is not free. Eort
and other resources must be expended on
it. Waste must be collected, transported
and processed before it can re-enter the
productive process. The costs can be substantial. If those private costs exceed the
private savings, prots will suerand so,
most likely, will social welfare.
Advocates of recycling would say this
is short-sighted and wrong, because it ignores the need to conserve natural resources. Shortages of materials (such as
newsprint), and of the natural resources
needed to produce them (trees), are not reected in the prices paid, they argue. So a
private calculation of costs and benets
will not suce. Prot, which is private benet minus private cost, might rule out recycling, whereas a broader social calculation
of costs and benets would show a dierent balance. Since society has a collective
interest in conserving resources, an interest not reected in the market prices of
commodities, recycling might very well reduce prot but at the same time increase
welfareand, as with corporate philanthropy, that is what CSR is about.
The trouble is, the notion that the market prices of commodities fail to reect
their scarcity is wrong. In commodity markets, prices reect scarcity just ne. The
long-term global trend of falling commodity prices, despite growth in the world
economy, is not due to the failure of markets to reect diminishing supplies and impending shortages. Commodity markets
are for the most part ecient and forwardlooking. Commodity prices, measured
over recent decades, have followed a
downward trend because innovation has
brought about ever-rising productivity in
the use of those resources. In other words,
supply has outstripped demand. Where,
unusually, it has not, prices have indeed
gone upproviding the signal that may
make recycling in those cases commercially sensible.
By and large, the world is not running
out of resources; where it is, prices reect
that fact. As a result, the ordinary pursuit
of prots is an excellent guide to companies on whether to recycle. There is no
need to anoint recycling as a kind of moral
standard of responsible behaviour. And if
doing so succeeds in deecting companies
from thinking hard about their costs, actual social harm results. Use of materials is
an area where private and social benets
are typically well-aligned.
Consider, nally, the case of CSR that
A survey of corporate social responsibility 5
raises prots but lowers welfarepernicious CSR. Recognising the existence of
this category is especially important.
Some economically literate bosses argue
that if CSR raises prots then it must by the
same token raise social welfare. So long as
good corporate citizenship is good for the
bottom line, they assume, you can rest assured that it must be win-win, and good
for society as well. As a rule, this may be
true. But there are some large exceptions.
Almost all CSR advocates are passionate about sustainable development. The
idea is strongly endorsed by governments
everywhere, by institutions such as the
World Bank and the United Nations, and
indeed by anybody at all with a desire to
be thought well of. It has become an organising principle for the whole CSR movement. Emphasis is laid on environmental
protection and on responsible behaviour
towards workers and communities in the
developing countries. In order to advance
those eminently worthy goals, some companies have lately devised codes of practice, or have adopted codes written by
other organisations. The danger lies in the
detail of these policies.
To many advocates of CSR, and to virtually all of the NGOs that have given the
CSR movement its intellectual drive,
responsible behaviour towards workers in
the developing countries goes far beyond
giving them jobs at market wages and
complying with local laws and regulations
on matters such as health and safety. There
is a debate in CSR circles about exactly
how much higher than this the standard of
responsible conduct should be. Some improvement on the minimal market standard is probably win-win in any case, because
rich-country
multinationals
operating in developing countries typically want to hire from a big pool of keen
applicants and to nd better-than-average
workers. Rich-country multinationals do
in fact pay substantially higher wages and
give substantially better benets (such as
access to health care) than the local norm.
But how much of an improvement on this
prot-seeking market standard does good
corporate citizenship require?
Some CSR advocates have aligned
themselves with those in the NGO movement who regard it as wrongexploitative,
or unfairto hire workers in the developing countries on any terms that are signicantly less generous than those granted to
their rich-country workers. Companies
under NGO scrutiny have been dissuaded
from investing in manufacturing operations in developing countries such as India
or Bangladesh, or have decided to end
such operations, faced with charges that
they are employing sweatshop labour.
As good corporate citizens, they say with
arms twisted behind their back, they no
longer do that. Many development NGOs
are pushing for labour standards that
would mandate this kind of best practice, and want these standards written
into future trade agreements.
The evidence clearly shows that policies of this kind (especially if they come to
be required of all companies as part of future trade pacts) are not in the interests of
the workers they purport to help. Foreign
direct investment in the third world is
known to be one of the best spurs to economic development: just look at China.
Even when the wages and other terms offered to local workers are much less generous than those oered to their western
counterparts, they are typically much better than the local economy can provide,
which is why jobs with foreign multinationals are nearly always in great demand
in poor countries.
Attitudes that discourage such investment by making it less protable, or by exposing companies that have made such investments to ridicule or censure, undoubtedly hold poor countries back. They
also keep in poverty the very workers who
would otherwise have got those jobs. To
withdraw from such investments, as good
corporate citizens are frequently enjoined 1
6 A survey of corporate social responsibility
2 to, may well be protable for the compa-
nies concerned because staying put would
impose heavy costs on their reputation.
Capitulating to the ill-judged demands of
the NGOs may be rational, prot-seeking
behaviour on their part. But in this case,
what is good for prots is bad for welfare.
This danger is compounded when CSR
leaders campaign for the introduction of
codes that impose such standards on all
rms. This too may be ne for prots,
which is why so many companies have begun to endorse this policy. It is a good idea
for a business to hobble its competition if
possiblewhich is what mandatory labour standards of the sort demanded of
the WTO tend to do. How much better if
grasping this commercial advantage can
be disguised as acting the good corporate
citizen. But hobbling the competition is
bad for the public at large. Again, by depriving them of investment, such perverted virtue especially harms the economic prospects of developing countries.
All this underlines a broader worry.
Companies do operate in a climate of
opinion. To be successful and protable,
they must take account of how they are
perceived. Big, successful businesses,
which often nd themselves in the public
view, strive constantly to improve and pro-
The Economist January 22nd 2005
tect their reputation. This is just as it
should be: concern for the way they are
judged by customers, suppliers and the
world at large is a useful discipline. If it
were absent, there would be no economic
pressure on companies to behave decently. If nobody is paying attention, why
worry about dealing honestly with people, or honouring a contract? This pressure
of outsiders’ perceptions is an indispensable force. Without it, companies in a private-enterprise system would be nasty,
brutish and very short-lived.
Need to know
However, it is important that this pressure
should be well-informed, or at least not utterly misguided. In particular, it needs to
embody some basic economic understanding. Unwarranted, misguided or
contradictory public demands on companies, especially if these demands emerge
in due course as government mandates,
can aect decisions in such a way as to detach protable business conduct from the
public good.
If the public decides to punish banks
and other service companies that move
their call-centres oshore by withholding
its custom, the prot-seeking company
will respond by ending the practice.
Whether that response advances the
broader social good then depends on the
circumstances. If consumers reject outsourcing of this kind because it provides a
lower quality of service, ne: that is the
market working as it should. If the public
rejects outsourcing because it falsely believes that workers in foreign call-centres
are being exploited, that is not ne: that is
the market, through popular misconception, getting it wrong.
In a way, this is to concede an important point to the advocates of CSR. Capitalism does function on top of, and one way
or another is moulded by, prevailing popular opinion. As noted earlier, the conditions that must be satised if capitalism is
to serve the public good are not trivial. A
comprehending and supportive climate of
opinion must be added to the list. That is
why the battle of ideas matters so much.
CSR comes in a wide variety of forms.
Judged by results, it may be win-win, borrowed virtue, delusional or pernicious.
Judged by motives, it may be done in good
faith or bad faith, out of conviction, boredom or vanity, by genuinely well-intentioned business leaders or by cynical
bosses looking to dupe their consumers.
But invariably, and dangerously, it is underpinned by mixed-up economics. 7
The world according to CSR
Good corporate citizens believe that capitalism is wicked but redeemable
O
VER the past century or so, and especially in the past 50 years, the western
industrial democracies have experienced
what can only be described as an economic miracle. Living standards and the
quality of life have risen at a pace, and to a
level, that would have been impossible to
imagine in earlier times.
This improvement in people’s lives,
staggering by any historical standard, is
not measured solely in terms of material
consumptionimportant though it is, for
instance, to have enough to eat, to keep
warm in winter, to be entertained and
educated and to be able to travel. In addition to material gains such as these, and to
all the other blessings of western consumer society, broader measures of wellbeing have raced upward as well: infant
mortality has plummeted, life expectancy
has soared, and the quality of those extended years of life, in terms of freedom
from chronic sickness and pain, is better
than earlier generations ever dreamed it
could be.
All this has been bestowed not just on
an elite, but on the broad mass of people.
In the West today the poor live better lives
than all but the nobility enjoyed throughout the course of modern history before
capitalism. Capitalism, plainly, has been
the driving force behind this unparalleled
economic and social progress. Yet today it
is suspected, feared and deploredand not
just by the kind of energetic anti-capitalists
who now and then put bricks through the
windows of McDonald’s.
According even to middle-of-the-road
popular opinion, capitalism is at best a regrettable necessity, a useful monster that
needs to be bound, drugged and muzzled
if it is not to go on the rampage. Stranger
still, this view seems to be shared by a
good proportion of business leaders. Cap-
italism, if guided by nothing but their own
unchecked intentions, would be wicked,
destructive and exploitative, they apparently believebent on raping the planet
and intent on keeping the poor outside the
capitalist West in poverty.
In a much-discussed recent book, The
Corporation: The Pathological Pursuit of
Prot and Power, Joel Bakan, a law professor at the University of British Columbia,
lays bare the danger. His themes were further developed and illustrated in a lm of
the same title, which was also successful
and well reviewed.
The corporation’s legally dened mandate is
to pursue relentlessly and without exception
its own economic self-interest, regardless of
the harmful consequences it might cause to
othersToday, corporations govern our
lives. They determine what we eat, what we
watch, what we wear, where we work and
what we do. We are inescapably surrounded 1
The Economist January 22nd 2005
2
by their culture, iconography and ideology.
And, like the church and the monarchy in
other times, they posture as infallible and
omnipotent, glorifying themselves in imposing buildings and elaborate displays.
Increasingly, corporations dictate the decisions of their supposed overseers in government and control domains of society once
rmly embedded in the public sphere. Corporations now govern society, perhaps
more than governments themselves do; yet
ironically it is their very power, much of
which they have gained through economic
globalisation, that makes them vulnerable.
As is true of any ruling institution, the corporation now attracts mistrust, fear and demands for accountability from an
increasingly anxious public. Today’s corporate leaders understand, as did their predecessors, that work is needed to regain and
maintain the public’s trust. And they, like
their predecessors, are seeking to soften the
corporation’s image by presenting it as human, benevolent and socially responsible.
In Mr Bakan’s view, CSR is mostly a
fraud. Companies, after all, are in pathological pursuit of prot and power. CSR is
merely a means to those ends, a way to ingratiate capitalism to a rightly suspecting
public. The book’s jacket has blurbs of generous praise not just, as you might expect,
from Noam Chomsky but also from an investment-fund manager and a CEO, who
says it is holding up a mirror for [corporations] to see their destructive selves as others see them.
Many businessmen do seem to recognise themselves in that mirror. And popular culture has the corporate psycho in
plain viewwhich is remarkable, given
the corporation’s suocating grip on all
thoughts and deeds. What is the capitalist
ethos according to Hollywood? Greed is
good, as Gordon Gekko explained in
Wall Street. From RoboCop (the military-industrial complex) to Super Size
Me (fast-food tyrants) and back again, the
brave unequal war against corporate dominion is waged.
This paranoid fear of capitalism, shared
by so many of its leading practitioners,
boils down to two main ideas. First, prot
in its own right has nothing to do with the
public good. A company in pursuit of prot is seeking a purely private gain. If the
pursuit of prot is to yield an advance in
social welfare, then something else, acting
with deliberation and intelligence from
outside the corporation, must intervene.
Second, in their mad pursuit of private
gain, companies are driven by the logic of
their quest to place crippling burdens on
society and on the environment.
A survey of corporate social responsibility 7
So far as society at large is concerned, in
other words, the untrammelled pursuit of
prot yields nothing, but costs plenty. Unless it is checked either by CSR or (as Mr Bakan would prefer, if only as a rst step) by
double-strength government regulation,
private enterprise makes losers of everyone but itself.
Private prot, public interest
The perceived tension between private
prot and public interest pervades the CSR
literature. Yet the idea is never examined. It
is always regarded as self-evident.
The top executives at Royal Dutch/Shell
have lately been acting as CSR thoughtleadersand they are CSR champions in
other ways as well (through the activities
of the generously supported charitable activities of the Shell Foundation, for instance). Shell has a lot of popular suspicion to live down, following the scandal
over its operations in Nigeria, for instance,
and the controversy surrounding its plans
for the disposal of the Brent Spar oil-drilling platform in the North Sea. Its senior executives have done their best. In a leaet
explaining why the company had embraced CSR, Sir Mark Moody-Stuart, who
was chairman between 1998 and 2001,
and before that managing director, wrote:
[M]y colleagues and I on the committee of
managing directors are totally committed to
a business strategy that generates prots
while contributing to the well-being of the
planet and its people.
That seems entirely unobjectionable,
you might think: a commitment to motherhood and apple pie. But the clear implicationand Sir Mark, to judge by other
speeches and articles, buys it wholesaleis that if Shell simply made prots for
its owners, that would in itself contribute
nothing to the planet and its people.
From this it follows that if Shell is to justify
its activities to society at large, it has to do
more than just make money for its owners.
Therein lies the case for CSR. But is the premise actually true? True or false, it is never
challenged.
One of the world’s foremost CSR networks and organisations is the World Business Council for Sustainable Development. Its membership is made up of 175
big multinationals, including Shell, alongside rms such as ABB, Dow Chemical,
Ford, General Motors, Procter & Gamble,
Time Warner and so on. One of the council’s publications begins:
Although the rationale for the very existence
of business at law and in other respects is to
generate acceptable returns for its shareholders and investors, business and business leaders have, over the centuries, made
signicant contributions to the societies of
which they form part.
Why yes. If you compare people’s lives
in the West today with those of people living, say, a century ago, or two centuries
ago, it would be right, if perhaps a little miserly, to concede that business has made
some signicant contributions. But in
the council’s opinion these moderately important benets did not arise because
businesses generated acceptable returns
for their owners; they arose despite that
fact. Prot, unfortunately, is necessary, as
the council sadly notes: otherwise you
cannot have business, along with the possibility of those quite useful contributions.
But those contributions have to be separately willed. It is simply not in the nature
of business as such to contribute. That is
an add-on, a responsibility that business
may choose to discharge or not discharge,
as it sees t.
So, anti-capitalists believe this; angry
law-school professors (whose own signicant contributions cannot be in doubt) believe it; and the leaders of international big
business believe it. For good measure,
many industrial-country governments,
acting singly or in concert, believe it as 1
8 A survey of corporate social responsibility
2 well. Britain is just one of many countries
to have designated a minister responsible
for encouraging CSR initiatives. In 2001 the
European Commission published a consultative paper entitled, Promoting a
European Framework for Corporate Social
Responsibility. The aim is to launch a
wide debate on how the European Union
could promote corporate social responsibility at both the European and international level. Values, it says, need to be
translated into action.
Leading international institutions such
as the World Bank, the United Nations, the
Organisation of Economic Co-operation
and Development, and indeed more or
less any outt of that sort you care to
name, endorse the view that prot serves
an exclusively private interest, and that
blind pursuit of prot is therefore likely to
prove socially harmful.
The United Nations is especially keen
on CSR, as part of a broad new approach to
global governance. It continues to promote
its Global Compact, launched at the
World Economic Forum in 1999. This initiative aims to draw together businesses
and business organisations, NGOs, and
UN and other international agencies. The
goal of this new tripartisman ongoing
discussion among governments, companies and civil society (which is how the UN
refers to NGOs)is to nd ways to underpin the free and open market system with
stable and just societies.
It is one thing to believe that prot-seeking serves no public interest directly. It is
another to believe that prot-seeking, unless tempered and channelled by CSR or in
some other way, actually works against
The Economist January 22nd 2005
the public interest. This second idea, already noted, is an extension of the rst.
And this is where sustainable development comes in.
The concept of sustainable development puts esh on the idea that business
left to its own devices is dangerous. Untamed prot-seeking, it is argued, puts
strain on the environment and exploits
workers. At the same time the goal of sustainable development points to a more
concrete agenda for CSR: while pursuing
prot, enlightened companies should take
care to protect the environment and uphold the rights of workers (and others) as
well. Hence the triple bottom line which
thought-leaders on CSR (including the United Nations and the European Commission) want companies to monitor and report: don’t just aim to make money, but
protect the environment and ght for social justice as well.
Unsustainable
One problem with the triple bottom line is
quickly apparent. Measuring prots is
fairly straightforward; measuring environmental protection and social justice is not.
The diculty is partly that there is no single yardstick for measuring progress in
those areas. How is any given success for
environmental action to be weighed
against any given advance in social justiceor, for that matter, against any given
change in prots? And how are the three to
be traded o against each other? (CSR advocates who emphasise sustainable development implicitly insist that there must
be such a trade-o, at least when it comes
to weighing prot against either of the
other two.) Measuring protsthe good
old single bottom lineoers a pretty clear
test of business success. The triple bottom
line does not.
The problem is not just that there is no
one yardstick allowing the three measures
to be compared with each other. It is also
that there is no agreement on what progress on the environment, or progress in
the social sphere, actually meannot, at
least, if you are trying to be precise about
it. In other words, there are no yardsticks
by which dierent aspects of environmental protection can be compared even with
each other, let alone with other criteria.
And the same goes for social justice.
One company reduces its emissions of
greenhouse gases. One increases its spending on recycling. Another provides free
child-care facilities for its workers. Another raises the wages of its lowest-paid
workers. All of these things cost money:
suppose, for the sake of argument, that all
four have reduced prot by the same
amount. Which company has done most
to protect the environment? Which has
done most to advance social progress?
Overall, how far has each company improved its triple bottom line? Bearing in
mind the cost, can you even say that any of
them have done so?
The great virtue of the single bottom
line is that it holds managers to account for
something. The triple bottom line does
not. It is not so much a licence to operate as
a licence to obfuscate.
CSR advocates could reply that this
misses the point. The idea of the triple bottom line is not that the three-dimensional
performance of business can ever be
judged as precisely as its orthodox one-dimensional performance. The triple bottom line is just shorthand for saying: take
other things into account, acknowledge
that prot isn’t everything, and don’t pursue prot relentlessly, as you would otherwise be inclined to, even at the expense of
damage to the environment and infringements of the rights of workers and other
stakeholders. You cannot be precise about
these things, but at least you can recognise
the social and environmental peril of too
narrow a focus on prot.
That is a perfectly reasonable line of argumentor it would be, if a narrow focus
on prot really did endanger the environment, systematically infringe the rights of
workers and stakeholders, and in general
fail to serve the public interest. That is the
world according to CSR, but is the world
really like that? The short answer is no. For
a slightly longer answer, read on. 7
The Economist January 22nd 2005
A survey of corporate social responsibility 9
Prot and the public good
Companies that merely compete and prosper make society better o
A
DAM SMITH, you might say, wrote the
book on corporate social responsibility. It is entitled, Wealth of Nations.
Every individual necessarily labours to render the annual revenue of the society as
great as he can. He generally, indeed, neither
intends to promote the public interest, nor
knows how much he is promoting it...he intends only his own gain, and he is in this, as
in many other cases, led by an invisible
hand to promote an end which was no part
of his intention. Nor is it always the worse
for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more eectually
than when he really intends to promote it. I
have never known much good done by
those who aected to trade for the public
good.
It is not from the benevolence of the
butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their
own interest. We address ourselves, not to
their humanity but to their self-love, and
never talk to them of our own necessities but
of their advantages.
Smith did not worship selshness. He
regarded benevolence as admirable, as a
great virtue, and he saw the instinct for
sympathy towards one’s fellow man as the
foundation on which civilised conduct is
built (he wrote another book about this:
The Theory of Moral Sentiments). But
his greatest economic insightand indeed
the greatest single insight yielded by the
discipline of economicswas that benevolence was not in fact necessary to advance
the public interest, so long as people were
free to engage with each other in voluntary
economic interaction. That is fortunate, he
pointed out, since benevolence is often in
short supply. Self-interest, on the other
hand, is not.
If self-interest, guided as though by an
invisible hand, inadvertently serves the
public good, then it is easy to see why society can prosper even if people are not always driven by benevolence. It is because
Smith was right about self-interest and the
public interest that communism failed and
capitalism worked.
Most advocates of CSR, especially
those who run giant international corporations, have probably read some economics in their time. Many of the ocials
at the United Nations, World Bank and
OECD who argue in favour of CSR have advanced degrees in the subject from the best
universities. Yet they have apparently
failed to grasp this most basic and necessary insight of the entire discipline.
Through the action of Smith’s invisible
hand, the private search for prot does advance the public interest. There is no need
for thought-leaders in CSR armed with initiatives and compacts to bring this about.
Smith was a genius because this harmony of private interest and public interest is not at all obviousand yet, at the
same time, once it is pointed out, the idea is
instantly simple and plausible. This is especially so if you think not about self-interested individuals but about prot-seeking companies. The value that people
attach to the goods and services they buy
from companies is shown by what they
are willing to pay for them. The costs of
producing those goods and services are a
measure of what society has to surrender
to consume those things. If what people
pay exceeds the cost, society has gained
and the company has turned a prot. The
bigger the gain for society, the bigger the
prot. So prots are a guide (by no means a
perfect one, but a guide nonetheless) to the
value that companies create for society.
Does this mean that Gordon Gekko, the
odious protagonist of the movie, Wall
Street, was right to say that greed is
good? No: greed and self-interest are not
the same thing, as Mr Gekko discovered in
that movie. Greed, in the ordinary meaning of the word, is not rational or calculating. Freely indulged, it makes you fat and
drives you into bankruptcy. The kind of
self-interest that advances the public good
is rational and enlightened. Rational, calculating self-interest makes a person, or a
rm, worry about its reputation for honesty and fair dealing, for paying debts and
honouring agreements. It looks beyond
the short term and plans ahead. It considers sacrices today for the sake of gains tomorrow, or ve years from now. It makes
good neighbours.
Morally, also, there is a world of dierence between greed and self-interest. The
rst, even if it were not self-defeating,
would still be a gross perversion of the second. Failing to see this distinction, and
thus concluding without further thought
that private enterprise is tainted, is a kind
of ethical stupidity. Greed is ugly. There is
nothing ignoble, in contrast, about a calm
and moderate desire to advance one’s own
welfare, married (as it is in most people) to
a sympathetic regard for the well-being of
others. And, as Smith pointed out, rational
self-interest also happens to make the
world go round.
Faulty premise
The premise that CSR advocates never
question is in fact wrong. It is an error to
suppose that prot-seeking, as such, fails
to advance the public good, and that special eorts to give something back to society are needed to redeem it.
However, as already noted, prot succeeds as an indicator of value creation, and
as a signal that draws new investment to
socially useful purposes, only under cer- 1
10 A survey of corporate social responsibility
The Economist January 22nd 2005
2 tain circumstances. It cannot be taken for
granted that these conditions will always
be satised.
One main requirement is that rms are
in competition with each other. The prots
that a monopoly can extract from the economy are a measure of market power, not
social gain. And monopoly prots may not
serve as an eective signal for new investment if economic barriers of one kind or
another hamper competition by keeping
new entrants o the monopolist’s turf.
Oddly enough, business leaders who
voice their commitment to good corporate
citizenship rarely demand the removal of
barriers to competition in their industriesa measure that would almost invariably serve the public interest. Manufacturers are far more likely to call for import
barriers to be raised against their foreign
competitors than they are to call for existing taris or other barriers to come down.
Producers of all manner of goods and services are more likely to call for the introduction of licences and controls to protect
their existing positions in their markets
than to demand that newcomers should
be permitted and even encouraged to contest those markets.
And CSR often helps them in this. Although it is true that many business leaders mean what they say about good corporate citizenship, and speak up for CSR in
good faith, CSR is nonetheless far more often invoked as a rationale for anti-competitive practices than as a reason to bolster
competition. Incumbent rms or professions seem to nd it easier to comply with
burdensome regulations if they know that
those rules are deterring new entrants.
That is why, often in the name of CSR, incumbent businesses are so given to calling
for rules and standards to be harmonised
and extended, both at home and abroad.
For the good of the public, you understand, barristers are opposed to reforms
that would allow solicitors to appear more
often as advocates in English courts (their
training just isn’t up to it). For the safety of
the consumer, American pharmaceutical
companies insist, extraordinary precautions must be taken before drugs can be
imported from Canada (heaven knows
what the Canadians, a devil-may-care sort
of people, put into those pills). For the
good of the world’s poor, industrial-country manufacturers believe, goods should
not be imported from countries where employees have to work long hours for low
pay and without statutory vacations (that
is unfair trade).
A great deal of economic regulation
makes sense for one reason or another. But
it is striking that business leadersespecially, it seems, those who speak up most
enthusiastically for CSRcall for regulation that restricts competition far more often than they call for regulation that
strengthens it. This prompts the thought
that the design of economic regulation is
best left to governments, rather than to corporate citizens, however enlightened.
Social prices
A second condition must be met before
one can be sure that private enterprise in
competitive markets is advancing the public good. Prices need to reect true social
costs and benets. Many transactions,
however, have side-eectsexternalities,
as they are called. Where they do, private
costs and benets diverge from public
costs and benets. Sometimes externalities are positive. If your neighbour repaints his house, that may increase the
value of yours; since he fails to capture all
the gains created by his spending, he may
repaint his house less frequently than
would be best for society at largeor, in
this case, for your end of the street. Markets
tend to undersupply goods that involve
positive externalities.
Externalities can also be negative. The
classic instance is a polluting factory. The
owners of the factory and the customers
for its goods do not have to bear the full
costs of the pollution that comes out of its
smokestacks. Failing to take that into account, the market sets the price of the factory’s goods too low. Demand for the product is stronger than it should be. Goods
that involve negative externalities tend to
be oversupplied.
This kind of argument is invoked to
make sense of sustainable development
and the claims pressed on business by that
idea. Prices are wrong, the argument goes,
so markets are failing. Pollution, including
the accumulation of greenhouse gases, is
not priced into the market, so there is too
much of it. Impending shortages of natural
resources are not priced into the market, so
those resources are consumed too rapidly.
The value of wilderness, either for its
beauty or for its stocks of endangered species, is not priced into the market, so too
much of it gets cemented over.
Whether the pattern of consumption
based on these false prices is sustainable is
really beside the point. Some patterns of
consumption could be indenitely sustained but still be wrong, causing mounting damage as far ahead as one can see.
Others might indeed be unsustainable,
meaning bound to be halted at some
point, yet not be wrong, as when the approaching exhaustion of a raw material
leads to the invention of a substitute. Sustainability has a nice ring to it, but it is not
the issue. The question is whether false
prices are causing big economic mistakes
and, if so, what might be done about that.
Many market prices do diverge from the
corresponding shadow prices that
would direct resources to their socially
best uses. In many cases, the divergence is
big enough to warrant government actiona point which all governments have
taken on board, sometimes to a fault. All
industrial-country governments intervene
in their economies. In principle, much of
this intervention aims to mitigate the mis- 1
The Economist January 22nd 2005
2 allocation of resources caused by external-
ities and other kinds of market failure. But
it is important to keep a sense of proportion about the supposed unreliability of
market signals.
So far as environmental externalities
are concerned, most leading advocates of
CSR seem to be in the grip of a grossly exaggerated environmental pessimism. The
claim that economic growth is necessarily
bad for the environment is an article of
faith in the CSR movement. But this idea is
simply wrong.
Natural resources are not running out,
if you measure eective supply in relation
to demand. The reason is that scarcity
raises prices, which spurs innovation: new
sources are found, the eciency of extraction goes up, existing supplies are used
more economically, and substitutes are invented. In 1970, global reserves of copper
were estimated at 280m tonnes; during the
next 30 years about 270m tonnes were
consumed. Where did estimated reserves
of copper stand at the turn of the century?
Not at 10m tonnes, but at 340m. Available
supplies have surged, and, it so happens,
demand per unit of economic activity has
been falling: copper is being replaced in
many of its main industrial applications
by other materials (notably, bre-optic cable instead of copper wire for telecommunications).
Copper, therefore, is unlikely ever to
run outand if it did, in some very distant
future, it would be unlikely by then to matter. The same is true for other key minerals.
Reserves of bauxite in 1970 were 5.3 billion
tonnes; the amount consumed between
1970 and 2000 was around 3 billion
A survey of corporate social responsibility 11
tonnes; reserves by the end of the century
stood at 25 billion tonnes. Or take energy.
Oil reserves in 1970: 580 billion barrels. Oil
consumed between 1970 and the turn of
the century: 690 billion barrels. Oil reserves in 2000: 1,050 billion barrels. And
so on.
The colour of gloom
What about pollution? On the whole, rich
countries are less polluted than poor countries, not more. The reason is that wealth
increases both the demand for a healthier
environment and the means to bring it
about. Environmental regulation has been
necessary to achieve this, to be sure, because pollution is indeed an externality.
But it is not true that the problem has been
left unattended in the rich world, that
things are therefore getting worse, and that
CSR initiatives have to rise to the challenge
of dealing with this neglect.
Strong environmental protection is already in place in Europe and the United
States. In some cases, no doubt, it needs to
be strengthened further. In some other
cases, most likely, it is already too strong.
Overall, the evidence fails to show systematic neglect, or any tendency, once government regulation is taken into account, for
economic growth to make things worse.
How much of an exception to this is
global warming? Potentially, as many CSR
advocates say, a very important one. Emissions of greenhouse gases are causing
stocks of carbon in the atmosphere to grow
rapidly. Almost all climate scientists expect this to raise temperatures to some unknown extent during the coming decades.
If temperatures rise towards the upper end
of current projections, the environmental
damage will be great.
Yet the world still lacks an eective regime for global carbon abatement. This is
not so much because the United States has
refused to support the Kyoto agreement as
because that agreement is deeply awed
in any casebut this is beside the point.
Global warming is a potentially very signicant externality that governments up
to now have failed to address properly.
Another such case is excessive encroachment on wilderness areas. Once a
wilderness has been lost, it cannot be replacedand, unlike for copper or oil, there
will never be a substitute. Governments in
many rich and poor countries are neglecting this issue.
But on questions such as these, where
governments are, it seems, leaving signicant market failures unaddressed, the
question for businesses is whether CSR
can do anything useful to bridge the gap.
Many companies at the forefront of the
CSR movement have embarked on initiatives of their own, aimed, for example, at
reducing greenhouse-gas emissions or at
protecting wilderness areas.
These would need to be judged case by
case, to see whether particular policies
were instances of good management (as
when an oil company invests protably in
alternative fuels, anticipating both shifts in
consumer demand and forthcoming taxes
on carbon), borrowed virtue, (for example, creating private wilderness reserves at
shareholders’ expense), pernicious CSR
(blocking competition in the name of specious environmental goals) or delusional
CSR (increasing emissions of greenhouse
gases in order to conserve raw materials
that are not in diminishing supply).
There will be good and bad. As a general rule, however, correcting market failures is best left to government. Businesses
cannot be trusted to get it right, partly because they lack the wherewithal to frame
intelligent policy in these areas. Aside
from the implausibility of expecting the
unco-ordinated actions of thousands of
private rms to yield a coherent optimising policy on global warming, say, there is
also what you might call the constitutional
issue. The right policy on global warming
is not clear-cut even at the global level, to
say nothing of the national level or the
level of the individual rm or consumer.
Devising such a policy, and sharing the
costs equitably, is a political challenge of
the rst order. Settling such questions exceeds both the competence and the proper
remit of private enterprise. 7
12 A survey of corporate social responsibility
The Economist January 22nd 2005
The ethics of business
Good corporate citizens, and wise governments, should be wary of CSR
R
ECALL that Joel Bakan, the angry lawschool professor and scourge of modern corporations, argued that CSR is usually a scam. It is for governments, he says,
not rms, to decide questions of social,
environmental and industrial policyand
governments should know that if they fail
in that duty, the psychotic corporation,
quite likely hiding behind CSR, will continue to rape and pillage.
Mr Bakan and those who share his morbid fear of capitalism are wrong about that
second point. Not only is competitive private enterprise already heavily regulated; it
also comes with a great deal of built-in additional self-interested self-regulation, as
it were. But they are quite right about the
rst point. It is indeed desirable to establish a clear division of duties between
business and government. Governments,
which are accountable to their electorates,
should decide matters of public policy.
Managers, who are accountable to their
shareholders, should run their businesses.
Does this mean that managers need not
concern themselves with ethics? Just the
opposite. Managers should think much
harder about business ethics than they appear to at present. It is lack of clarity about
business ethics that gives rise to confusion
over what managers’ responsibilities are,
and over where the limits of those responsibilities lie.
The crucial point is that managers of
public companies do not own the businesses they run. They are employed by the
rms’ owners to maximise the long-term
value of the owners’ assets. Putting those
assets to any other use is cheating the owners, and that is unethical. If a manager believes that the business he is working for is
causing harm to society at large, the right
thing to do is not to work for that business
in the rst place. Nothing obliges someone
who believes that the tobacco industry is
evil to work in that industry. But if someone accepts a salary to manage a tobacco
business in the interests of its owners, he
has an obligation to those owners. To out
that obligation is unethical.
In addition, of course, managers ought
to behave ethically as they pursue the
proper business goal of maximising
owner valueand that puts real con-
straints on their actions. In most cases, acting within these constraints advances the
aim of the business, just as individuals
nd that enlightened self-interest and ethical conduct usually sit well together. But,
for rms as for people, this will not always
be true. Sometimes the aims of the business and rational self-interest will clash
with ethics, and when they do, those aims
and interests must give way.
Much the same goes for acting within
the law. In democratic societies where the
rule of law is upheld, businesses and individuals should work under a strong presumption that they will obey those societies’ laws. This will generally be good for
business, and usually will be ethical as
wellbut, again, not always. Now and
then, depending on the circumstances, it is
wrong to obey the law. And merely following the law does not exhaust a rm’s
ethical responsibilities, any more than it
does an individual’s. Some things that are
legal are unethical; and many things required by ethics are not required by law.
Managers of companies must confront
these questions in running their businesses, just as individuals must in leading
their everyday lives. Business ethics, in
short, is not an empty box. But what ex-
actly is in the box?
Elaine Sternberg, an academic philosopher and business consultant (and a former investment banker), persuasively argues in her book, Just Business, that
there are two main things: ordinary decency and distributive justice. These
need to be understood in relation to the
proper goal of the rm. Without these basic values, business would not be possible.
Be decent, be just
If owner value, and ownership itself, are
to mean anything, there must be respect
for property rights. This excludes, Ms
Sternberg points out, lying, cheating,
stealing, killing, coercion, physical violence and most illegality; it calls instead
for honesty and fairness. Taken together,
in her formulation, these constraints reect the demands of ordinary decency.
Some businessmen appear to believe
that anything which is not outright illegal,
however unethical, can be regarded as
proper business conduct. But without ordinary decency (which goes a long way beyond what the law requires of rms), business could not be carried on.
Firms that lie and cheat cannot expect
to stay in business very long, even if their 1
The Economist January 22nd 2005
2 actions are allowed by law. Dishonest
companies will be unable to borrow, to
obtain working capital, or to form stable
business relationships with suppliers and
customers. Decency in this sense is not just
good for business, it is essential. When it
comes to maximising long-term owner
value, honesty is not just the best policy, it
is the only feasible policy.
Crime doesn’t pay
What about organised crime, you might
ask? The maa lasted pretty well as a prot-maximising business, did it not? Yes,
but organised crime nonetheless proves
the point. See what a criminal or indecent enterprise has to do to grow and survive: it must corrupt and intimidate, and
thoroughly subvert both politics and the
criminal-justice system. Some sick jurisdictions have let that happen. Where the
rule of law prevails, however, those methods do not work outside a highly circumscribed and perpetually beleaguered criminal domain. Inside this zone, enterprises
are small, always in hiding, and in pathological conict with each other. Outside it,
in the light, honesty and fair dealing are required if business enterprises are to
prosper and survive.
Granted, some critics of business regard the big multinationals as little more
than outposts of a maa-like empire. In the
world according to Michael Moore, such
companies do systematically lie and cheat,
and get away with it by corrupting and
intimidating, and subverting both politics
and the criminal-justice system. There is
indeed little to choose, on this view, between Halliburton (or IBM, for that matter,
or General Motors or GlaxoSmithKline)
and the cosa nostra. Now and then executives do commit crimes, of course. Usually,
they are found out and punished. That
aside, if you believe that the big multinationals are essentially criminal enterprises getting away with murder (perhaps
literally), you are beyond the reach of an
article about business ethics.
What about the second component of
business ethics, distributive justice? In the
business context, this simply means aligning benets within the organisation to the
contribution made to achieving the aims
of the rm. Pay linked to performance and
promotion on merit are instances of distributive justice within the company.
Much of what was said about the role
of ordinary decency applies here too.
Again, these notions of what is fair are
widely accepted; on the other hand, they
are not, for the most part, required by law;
A survey of corporate social responsibility 13
as a practical matter, they are needed if the
business is to do as well as it can; and they
are also questions of ethics, and hence part
of the ethics of business. To promote a
friend rather than the best person for the
job, or to reward a manager for incompetence or wrongdoing, is a bad way to run a
businessand is also unethical.
Many writers on business ethics, and
just about all advocates of CSR, argue that
this way of thinking mistakes the proper
purpose of the enterprise. Making money
for the owners is too narrow a view of
what a corporation is for. It raises ownershipmere ownership, as they would
saytoo high. Owners are just one group
among many kinds of dierent stakeholders in a business. It is wrong to run a
business in the interest of one kind of
stakeholder, ignoring the legitimate interests of all the others. Is this correct?
There is a lot of unnecessary confusion
about stakeholders. Businesses certainly
need to take account of other interested
parties if they are to succeed as businesses:
they must satisfy their customers, get on
with their suppliers, motivate their workers, and so forth. In that sense, these dierent groups of stakeholders will have their
say and exercise their inuence. But taking account of is not the same as being
held accountable to. Accountability refers
to a much more formal and direct set of
rights and obligations.
Of course it is always possible, as a matter of law, to create forms of managerial
accountability to non-owners. Through
the courts, you might say, managers are
held accountable to society at large. Public
policy can make managers accountable to
regulators. Managerial accountability to
workers can also be required by law:
worker representation on company
boards is mandated in Germany, for instance. (Whether this serves the interests
of German workers, or of Germany’s citizens in general, is nowadays in doubt.) But
all such lines of accountability recognise
owners as primary. You cannot deem
stakeholders to be equal co-owners of a
business without repudiating the very
idea of ownership. And where the law
does not create accountability to nonowners, there is none.
In many of the corporate scandals of recent years, it has seemed that managers
have acted as though they were accountable to nobodynot even, and in some
cases least of all, to the rms’ owners. This
has been rightly recognised as a problem,
and a lot of time and eort has been spent
on trying to make accountability to shareholderson matters such as executive
paymore eective.
Muddled thinking on CSR, and on supposed accountability to non-owners, only
makes it harder to put this right. Advocates
of CSR ought to reect on the fact that the
triple bottom line and the bogus pay
scheme which rewards bad performance
with riches have something important in
common: the idea that the interests of
mere owners should not be allowed to
come between managers and their personal objectives. Broken corporate governance and CSR are close relations. You often see them together.
Good companies, good government
An earlier section of this article sketched
out a four-way classication of CSR: good
management, borrowed virtue, pernicious CSR and delusional CSR. Does business ethics shed any more light on those
categories? It does, though some of the results are a little troubling at rst sight.
Good management and delusional
CSR raise no new diculties from an ethical point of view: the rst, which increases
prots and improves social welfare, is
plainly a good thing and the second,
which reduces both, is plainly not. Borrowed virtue has already been criticised
on ethical grounds, even though it is assumed to advance social welfare. That verdict stands, as you would expect. A proper
understanding of business ethics makes
the reasoning clearer, but the main thing is
still that the prots of a publicly owned 1
14 A survey of corporate social responsibility
2 company are not the managers’ to give
away. The remaining category is pernicious CSR, the kind that raises prots but
reduces social welfare.
Is pernicious CSR also unethical? Often, paradoxically, the answer will be no.
Managers cannot be criticised on ethical
grounds for aiming to increase long-term
owner-value: that is their job. Assuming
that they have also acted within the law,
the next question is whether they have violated the standards of ordinary decency
and distributive justice within the organisation. If they haveif they have lied, or
bribed, or coerced, for instancethen they
have behaved unethically. But if they have
acted in accordance with those two standards of business conduct, they are ethically in the right, even though they have
acted against the public interest.
This is not as strange as it seems. Consider the case of monopoly. Managers are
not to be criticised on ethical grounds for
striving to drive their competitors out of
businessprovided that they do this by
selling a better product, for instance, rather
than by deception or coercion or through
unlawful anti-competitive practices. And
if they succeed in establishing a monopoly, it is not unethical to set a price that
maximises the company’s prots, or even
(to the extent that the law allows it) to
create business barriers to the entry of
new competitors (for instance, by spending heavily on advertising). For that matter, it is not unethical for a company to
lobby the government for protection from
foreign competition, citing its concerns, as
a good corporate citizen, for the well-being
The Economist January 22nd 2005
of its workers. All of these things may well
be ethicaleven when, from the point of
view of society as a whole, they are likely
to be undesirable.
This seeming paradox only underlines
the point that businesses should not try to
do the work of governments, just as governments should not try to do the work of
businesses. The goals of business and the
goals of government are dierentor
should be. That, by the way, is why partnership between those two should always arouse intense suspicion. Managers,
acting in their professional capacity, ought
not to concern themselves with the public
good: they are not competent to do it, they
lack the democratic credentials for it, and
their day jobs should leave them no time
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even to think about it. If they merely concentrate on discharging their responsibility to the owners of their rms, acting ethically as they do so, they will usually serve
the public good in any case.
The proper guardians of the public interest are governments, which are accountable to all citizens. It is the job of elected
politicians to set goals for regulators, to
deal with externalities, to mediate among
dierent interests, to attend to the demands of social justice, to provide public
goods and collect the taxes to pay for them,
to establish collective priorities where that
is necessary and appropriate, and to organise resources accordingly.
The proper business of business is business. No apology required. 7
Future surveys
Countries and regions
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India and China March 5th
Turkey March 19th
Australia May 7th
Business, nance and economics
Consumer power April 2nd
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Higher education June 4th
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